Quite suddenly, it seems, Iran's economy is in serious trouble. In recent days, the country's national currency has fallen to record lows against the U.S. dollar. On October 1st alone, the value of the Iranian rial declined by some 17 percent, collapsing to 34,700 to one American dollar. (It has since reportedly fallen still further). All told, the rial has lost more than 80 percent of its worth over the past year.
The massive devaluation has exacerbated an already-dire fiscal situation in Tehran. Growing international pressure on the Iranian regime over its nuclear program has caused a massive spike in inflation in recent months. Officially, the Iranian government has said that national inflation stands at some 25 percent, but informed estimates suggest the true rate could be as much as double that figure. Unemployment has also soared, with an estimated 500,000 to 800,000 Iranians—between 2 and 3 percent of the country's overall labor force of 26.3 million—having lost their jobs in the past year.
The proximate cause of this economic decline is Western sanctions pressure, but structural flaws in Iran's economic edifice—and ruinous economic policies implemented by the regime in recent years—have made the situation a good deal worse.
They have also painted the Islamic Republic into a corner. Iran's ayatollahs, who not long ago were talking about the need to create an "economy of resistance" in response to Western pressure, are now facing something much worse: the risk of contagion and full-fledged domestic economic panic. Already, significant protests have erupted in Tehran and other urban centers, forcing the regime to deploy riot police in a bid to restore order. But it is already clear that unrest of the sort seen over the past week, if it continues (and especially if it expands) represents a real threat to regime stability.
The logical outcome is greater repression. Iran's clerical elite responded to the widespread discontent that accompanied the reelection of Iranian president Mahmoud Ahmadinejad in June 2009 with a massive—and successful—campaign of domestic oppression. The current crisis, with its repercussions on the country's overall economic health, has the potential to galvanize even broader anti-regime sentiment, thereby necessitating an even more draconian response. In tandem, however, the Iranian regime likely will need to sacrifice a political pawn.
The most likely candidate is Mahmoud Ahmadinejad. Over the past two years, Iran's firebrand president has publicly broken ranks with his one-time political sponsor, Iranian Supreme Leader Ali Khamenei, on a range of economic, political and social issues. Khamenei has handily won the tug-of-war that ensued, and the contest has left Ahmadinejad marginalized and largely sidelined in substantive national politics.
Given this pariah status, and with the end of his presidential term looming next summer, Ahmadinejad's political days are already numbered. Add to that some downright counterproductive fiscal policies implemented on his watch, and Iran's head of state begins to look like an ideal patsy—someone on whom Iran's clerical elite can pin the blame, even as they crack down on popular dissent. (Indeed, as Mehdi Khalaji of the Washington Institute points out, there are clear signs that this marginalization has already commenced.)
But if Iran's political future is in flux, its strategic course likely isn't. Ahmadinejad himself recently blamed the rial's recent slide on "enemies" of the Islamic Republic, and vowed that the regime would not "retreat on the nuclear issue." That's likely to be the case whether or not he remains a political player. Because, for the Islamic Republic, nuclear acquisition has become a regime imperative—and a key guarantor of regime stability. It is also the most certain way for Iran's leaders to ensure the outside world doesn't interfere in support of Iran's opposition forces.
That means that, whatever the trajectory of the Islamic Republic's current economic disorder, its pursuit of the bomb isn't likely to waver. Nor will the challenge that it poses to the international community.